Could Alibaba Stock Help You Achieve Financial Success?

Alibaba‘s (NYSE: BABA) stock price witnessed a significant drop of 6% on Feb. 7 following the release of the company’s latest earnings report. Despite this decline, Alibaba’s third-quarter fiscal 2024 results indicated a 5% year-over-year increase in revenue, amounting to 260.35 billion yuan ($36.67 billion) – surpassing analysts’ estimates by $270 million. However, its adjusted earnings per ADS experienced a 2% decline to $2.67, although it exceeded the consensus forecast by $0.03 per share.

While the headline figures did not indicate a complete financial catastrophe, it is evident that Alibaba is facing struggles in revitalizing its core e-commerce and cloud businesses. Nonetheless, the stock is trading at a mere 8% premium to its IPO price and appears remarkably undervalued at 10 times the next year’s earnings. Could a contrarian investment of $10,000 in Alibaba today potentially pave the way to millionaire status over the next two decades?

Image source: Getty Images.

The Transformation and Challenges Faced by Alibaba

Alibaba’s zenith was evident in October 2020 when the company’s Chinese e-commerce marketplaces, including Taobao and Tmall, and its cloud platform were achieving remarkable success. Over the fiscal years from 2015 to 2020, the company observed a compound annual growth rate (CAGR) of 46% in revenue while its net income soared at a CAGR of 42%.

In fiscal 2021, Alibaba encountered a 41% rise in revenue, yet its net income only saw a 2% increment after Chinese antitrust regulators slapped the company with a record-setting $2.75 billion fine. Additionally, the regulators imposed restrictions on Alibaba’s e-commerce marketplaces, prohibiting the use of exclusive deals to lock in merchants, aggressive loss-leading promotions, and unapproved investments.

These limitations, along with challenging macroeconomic conditions and fierce competition from PDD (NASDAQ: PDD) and JD.com , hindered the growth of Alibaba’s Chinese e-commerce platforms. As a result, the company expanded its reach to overseas marketplaces, such as Lazada in Southeast Asia, Trendyol in Turkey, and the AliExpress cross-border marketplace, in a bid to diversify its e-commerce operations beyond China.

While facing a slowdown in e-commerce sales, Alibaba’s cloud segment also encountered formidable challenges. The prevailing macro headwinds led to reduced spending on cloud services by numerous companies, compounded by intense competition from Huawei, Tencent, and Baidu. Additionally, Alibaba lost significant clients, including ByteDance, amidst the escalating trade and tech conflict between the U.S. and China.

The Road to Potential Recovery for Alibaba

Amid these challenges, Alibaba’s revenue only saw a 19% increase in fiscal 2022 and a mere 2% rise in fiscal 2023. As a response to the slowdown, the company restructured its operations into six new units, implemented cost-cutting measures, and concentrated on bolstering its higher-growth divisions. However, a closer look at the table below reveals that Alibaba’s core businesses endured ongoing struggles over the past year.

Data source: Alibaba. YOY = year over year. RMB terms.

Taobao and Tmall, constituting 48% of Alibaba’s revenue in the first nine months of fiscal 2024, encountered challenges as PDD’s Pinduoduo diverted domestic shoppers. Although Alibaba’s Cloud Intelligence segment, accounting for 11% of its sales, showed sluggish growth, the company faced difficulties in “proactively” reducing its exposure to lower-margin industries and customers.

Despite the rapid growth of Alibaba’s International Digital Commerce business, contributing 10% to its revenue, it remained considerably unprofitable. In the same vein, its Local Services and Digital Media divisions reported continued losses, while the Cainiao segment finally achieved profitability following aggressive cost-cutting measures.

Forecasting the Potential for Millionaire-Making Returns

Essentially, Alibaba necessitates revitalizing its profitable Taobao/Tmall and Cloud Intelligence segments to sustain the expansion of its loss-making businesses. However, the company’s prospects of achieving a near-term recovery are marred by China’s economic deceleration and a daunting competitive landscape. The recent increase in its buyback plan by $25 billion suggests that Alibaba is running out of avenues to augment its revenue through strategic investments or acquisitions.

If Alibaba’s valuations remain unaltered, the company would need to achieve a 26% compound annual growth rate (CAGR) in revenue and earnings over the next 20 years for a $10,000 investment to metamorphose into $1 million. While such growth rates were conceivable in the past, they could now be nearly insurmountable due to the formidable macro, regulatory, and competitive challenges confronting its core e-commerce and cloud businesses.

Analysts envisage a CAGR of just 8% for Alibaba’s revenue and 27% for its net income from fiscal 2023 to fiscal 2026. While these growth rates are steady, investors seeking a Chinese e-commerce investment with the potential to yield millionaire-making returns should consider examining PDD more closely, instead of turning to Alibaba for a potential recovery.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu, JD.com, and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

The opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.